Click here to read the first part of U.S. Money Reserve President Diehl’s in-depth analysis.
It’s quickly becoming clear that President-elect Trump is committed to enacting his major campaign promises, tariffs, tax cuts, and immigration policies. Wall Street and most economists share a wide agreement that this agenda will require deficit financing, and nonpartisan projections of the deficits run from $7.8 to $15.6 trillion. For comparison, deficits during his first term came to $8.4 trillion.
Deficits of this size could lead to a spike in inflation.
With the national debt having surpassed $35 trillion, the Federal Reserve seems likely to respond to these deficits by increasing interest rates to cool the economy and reduce inflation, even if the economy is already losing steam. Higher interest rates would undercut housing, auto, and other debt-financed sectors, weakening the economy.
Fed action to raise rates might also trigger an attack on the Fed’s independence, creating yet another pressure that would reinforce rising rates as global confidence in U.S. monetary policy erodes.
In an uncertain, risk-off environment with stock values now highly inflated, higher bond yields (interest rates) would draw money away from equities, weakening stock values and sending global investors to safer havens. Falling stock markets could make people feel poorer and lead them to curtail spending. Higher interest rates would also strengthen the dollar, reducing foreign demand for U.S. exports and raising the energy costs of oil-dependent countries, including China, India, European nations, and Japan.
These pressures on our trading partners will intensify if tariffs are implemented. Not only would tariffs increase the cost of foreign products we buy, but they are also likely to trigger retaliatory tariffs by other countries against our exports. If that happens, our exports would fall, our exporters would suffer, employment would decline, and the U.S. economy would weaken.
If and when these economic dominoes fall, the currently weak economies of China, Europe, and Japan would fall into recession (in China’s case, worse than a recession: a deflationary spiral). Weakening demand in major world economies would reduce demand for U.S. goods and services.
As for immigrant reform, economic analysts suggest that if the United States proceeds with mass deportations, the cost of goods and services dependent on immigrant labor, such as agricultural products and building construction, would rise because of the resultant labor shortages. This would be another source of inflationary pressure in the United States.
The harbingers of higher inflation are already apparent.
On November 12, U.S. banks, anticipating higher interest rates next year, issued $23.5 billion in investment-grade bonds, the largest single day of debt issuance by banks in almost nine years.
A day later, yields on 30-year Treasurys rose above 4.6% for the first time since early July. The following graph shows how, as inflation fell over the spring and summer, interest rates also fell—until mid-September. Thereafter, despite inflation remaining tame, rates made an abrupt U-turn, reflecting concerns about future inflation and prospects for the new administration’s deficit-financed agenda.
These tariff, tax, and immigration policies are expected to increase inflation and interest rates while weakening stocks and the larger economy, here and globally.
Since most of these tariffs and some of the immigrant expulsions could be implemented without action by Congress, the inflationary and growth effects of these actions would be felt quickly. The tax cuts—and most of the government spending cuts—require congressional action, so their effects would come later.
That said, the economy might get a short-term boost as consumers, expecting higher prices and interest rates in the future, rush to buy housing, cars, and other high-dollar goods and services before everything gets more expensive.
We’re already seeing signs of this in so-called “doom spending,” where pessimistic consumers throw caution to the wind and make purchases they can’t afford or seek “retail therapy,” buying things that make them feel better. Watch for credit card debt and loan delinquencies to rise.
One important caveat regarding this scenario should be mentioned. If oil prices were to fall substantially and remain low, this could partially offset the inflationary and growth suppression forces described. And this might be in the cards next year. OPEC+ has struggled to maintain high oil prices despite lowered oil production quotas this year. Those quotas are slated to rise in 2025, and Saudi Arabia, OPEC’s de facto price-setter, has threatened to open the spigots to discipline OPEC’s quota-cheating producers. If this were to occur, we could see an abrupt fall in oil prices that would reduce inflationary and growth suppression pressures in the global economy.
What does all this mean for gold?
We know that gold has a long track record as a safe haven in times of great economic uncertainty, and what is described above is an environment of great complexity and uncertainty with many unknown and unknowable risks.
We also know gold’s reputation as a hedge against inflation, and I have explained the risk of rising inflation posed by an agenda of tax cuts, tariffs, and immigrant labor expulsions.
But what is gold’s track record during recessions? Does it offer wealth insurance in a weak economy? It does. Gold prices rose 25% during the six months around the short COVID-19-induced recession of 2020, and prices rose 150% during the Global Financial Crisis of 2007–2008 and the three years of rough waters that followed.
Moreover, huge gold purchases by central banks, particularly the People’s Bank of China (PBC), have been one of the major drivers of the rally in gold prices that began in October 2023. Then the PBC paused its purchases between May and October 2024, awaiting decreasing prices before resuming its long-term diversification into gold.
In other words, the PBC is doing exactly what many of our clients do: using gold to diversify a portfolio and “buying on the dip,” when prices are falling. Prices are now where they were in early September 2024, so if you had kicked yourself for not buying when prices were lower, now’s your chance.
I expect to see central banks return to the gold market by year-end.
Purchases by the Chinese public have been another major driver of gold prices, as they’ve sought one of the few safe havens available to them. The Chinese economy is a basket case, and the middling recovery efforts of China’s government have had little to no effect.
The political, economic, and demographic obstacles the government faces are great, so we’re probably safer predicting deterioration of China’s economy than improvement. We should expect Chinese buyers to follow the PBC in buying on the current dip in prices.
For centuries, war has been a driver of gold prices.
War has, for centuries, been a driver of gold prices. The current rally began with the Hamas attack on Israel in early October 2023. Since then, that conflict has expanded to four other Middle Eastern countries and drawn in the United States and its European allies. In the meantime, the war in Ukraine has intensified and spread into Russian territory, and China has become more aggressive in the South China Sea and the Pacific. Chinese President Xi has ordered his military to be prepared to annex Taiwan by 2026 with the goal of doing so by 2030, using force if necessary.
Add to these tensions the prospects of a trade war waged with U.S. tariffs and foreign retaliatory tariffs, U.S. reshoring of manufacturing, onshoring of strategic resource development—and we should expect geopolitical conflict to be a continuing force lifting gold prices.
What I’m describing here is a world in which investors of all stripes will be seeking safe havens and low-risk opportunities for price appreciation.
In the past, safe-haven buying would have meant U.S. Treasurys and gold. However, U.S. Treasury investors have been burned recently, as interest rates have risen faster than expected, making bonds an unattractive alternative as gold appreciated 42% since the rally began and 29% this year. The threat of “higher-for-longer” inflation and rising policy uncertainty may lead more institutions and individuals to turn to gold for wealth protection and price appreciation.
Besides driving interest rates higher, how does rising government debt play into this picture?
The U.S. media has had a single-minded focus on U.S. government debt. Yes, that debt is big, and it’s about to get a lot bigger. But the world is drowning in debt—government, corporate, and personal. Public debt in the United States is a fraction of the total Chinese public debt, now approaching 200% of China’s GNP. And trends in China’s economy and demography suggest their debt will be a much bigger problem for them than our debt will be for us.
Many other nations also have very high debt burdens and will likely be issuing huge amounts of debt to fund their basic operations and their development ambitions.
All this debt will test the global markets’ capacity to absorb the debt and will raise interest rates worldwide. It may also lead to big, perhaps massive, sovereign debt defaults along with the political and economic instability that always accompanies such defaults.
This perfect storm of forces—rising inflation and interest rates, falling stock values, slowing economies, central bank buying, Chinese public buying, intensifying geopolitical conflict, and excessive global debt burdens—is highly likely, in tag-team fashion, to assault investor portfolios for the foreseeable future. We have witnessed these forces at work during this 13-month rally, raising gold prices by 42%, even after the recent price correction.
All these forces are still at work; in fact, they are intensifying. This recent price correction presents an extraordinary opportunity to buy gold on the dip from the price it was fetching 60 days ago. I strongly recommend adding gold to your portfolio for the wealth protection it can afford and for the price appreciation it may offer, especially now.
